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Lessons Learned from Law Firm Failures

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Lessons Learned from Law Firm Failures ALA San Francisco Chapter Lessons Learned from Law Firm Failures Kristin Stark Principal, Fairfax Associates July 2016 Page 0 About Fairfax Fairfax Associates provides strategy and management consulting to law firms Strategy & Performance & Governance & Merger Direction Compensation Management Strategy Development and Partner Performance and Governance and Merger Strategy Implementation Compensation Management Firm Performance and Operational Structures & Practice Strategy Merger Search Profitability Improvement Reviews Market and Sector Merger Negotiation and Pricing Partnership Structure Research Structure Client Research and Key Process Improvement Alternative Business Models Client Development Merger Integration Page 1 1 Topics for Discussion • Disruptive Change • Dissolution Trends • Symptoms of Struggle: What Causes Law Firms to Fail? • What Keeps Firms From Changing? • Managing for Stability Page 2 How Rapidly is the Legal Industry Changing? Today 10 Years 2004 Ago Number of US firms at $1 billion or 2327 4 more in revenue: Average gross revenue for Am Law $482$510 million $271 million 200: Median gross revenue for Am Law $310$328 million $193 million 200: NLJ 250 firms with single office 4 11 operations: Number of Am Law 200 lawyers 25,000 10,000 based outside US: Page 4 2 How Rapidly is the Legal Industry Changing? Changes to the Law Firm Business Model Underway • Convergence • Dramatic reduction • Disaggregation in costs • Increasing • Process Client commoditization Overhead improvement • New pricing Model efforts models • Outsourcing • Client teams • Pricing experts Business Model • New leverage models • Partial equity partnerships • Service delivery • Non-partner track lawyers • Outsourcing • Different compensation • Improvements through Work Process Talent incentives process change, • Different models for innovations, project different practice groups management • Non-lawyer staffing Page 5 Recent Law Firm Failures Firm Size Year Dissolved BinghamMcCutcheon 795 2014 HeenanBlaikie 540 2014 Dewey & LeBoeuf 900 2012 Yoss 180 2011 Howrey 324 2011 WolfBlock 287 2009 Dreier 155 2008 ThacherProffit 170 2008 Thelen 400 2008 Heller Ehrman 550 2008 Page 7 3 Dissolution Trends 25 1000 900 20 800 700 15 600 Dissolutions 500 Largest Dissolutions 10 400 300 5 200 100 0 0 Dissolutions Largest *Includes US firms that had >10 lawyers at time of dissolution. Page 8 What Causes Law Firms to Fail? Symptoms of Struggle Lack of Declining Lack of Leadership Strategy/ Economics Integration Vacuum Strategic Missteps These are key indicators or “red flags” that the firm is heading towards failure Page 9 4 Catalysts Towards Dissolution Catalyst – Lack of Strategy Catalyst – Leadership Vacuum • Ill-defined strategy • Inability to confront tough issues • Poor strategy (e.g. size based) – Poor performing partners • Not recognizing changed market – Changes in client fundamentals preferences • Over-dependence on one client • Poorly planned succession or industry • Lack of multiple voices at the top • Inconsistency in strategic choices Page 10 Bingham McCutcheon’s Turning Point Profits per Equity Partner ($ 000s) 12.7% 2,000 1,715 1,625 1,690 1,600 1,420 1,443 1,475 1,335 1,200 800 400 - 2007 2008 2009 2010 2011 2012 2013 Net income down 24.4% Page 11 5 Catalysts Towards Dissolution Catalyst – Declining Economics Catalyst – Lack of Integration • Declining financial performance and failure to manage productivity / deal with excess • Groups of important partners with capacity conflicting or incompatible goals • Ill advised expansion • Collection of solo practitioners • Excessive debt load • Failing to integrate across offices and practice groups – Unfunded obligations – High fixed costs • Limited depth and expansive – Lateral guarantees breadth • Poor billing/collection practices Page 12 What Keeps Firms From Changing Direction? • Lack of trust • Current or past success clouds perspective • Desire for 100% consensus • Culture where no one is allowed to make tough decisions – The “kindler, gentler firm” • Independent practices (mini firms, lack of teamwork, cooperation) – “I like it here because they just leave me alone” • Compensation systems • Legal training/risk aversion Page 13 6 Challenge of Maintaining Partner Confidence: Typical Lawyer Personality Traits 90 89 71 Population 30 Average in Percentile Average Skepticism Urgency Resilience Autonomy Source: Dr. Larry Richard Page 14 Managing for Stability Develop a Leadership • Get key opinion leaders on board Coalition • Build coalitions with influential partners • Educate partners on external client and market trends Leverage Market Data • Use market data to identify performance gaps and force decision-making Establish Direction and • Build buy in around a direction/goals for the firm Show Action • Implement through detailed planning and accountability • Support and reward collaboration and teaming Encourage Integration • Facilitate sharing of internal resources • Does compensation support strategic goals? Align Structure • Does your firm have clear succession plans for leaders and clients? Page 15 7 Managing for Stability During a Period of Instability But managing for stability is not about maintaining course in the face of major industry change: “If you’re in business today and you’re trying to maintain the status quo, you’ll be toast.” – Starbucks CEO Page 16 Questions & Discussion Kristin Stark [email protected] www.FairfaxAssociates.com Fairfax Associates London Washington DC California © Fairfax Associates 2016. This material formed part of an oral presentation and is not a complete record of the discussion. Page 17 8.
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